The Doctor is “In”…With a Prescription for Managed Accounts

June 1, 2017—In previous blogs, we discussed how Target Date Funds can be confusing for retirement plan sponsor and participant alike. Such uncertainty can result in serious consequences: an increase in potential liability for plan sponsor fiduciaries and missed retirement income goals for participants. Now we turn to a superior investment solution for 401(k) and 403(b) plans: managed accounts.

In many ways, when I sit down with employers to discuss their company retirement plan, our discussions seem like a visit with the doctor. We discuss the anatomy and history of the plan. If there is any pain associated with the plan, we move to a phase of analysis, then to diagnosis and finally to prescription. Sometimes no pain per se may be present, but there are latent dangers that are discovered and promptly addressed – a kind of “checkup” and “preventative care.”

Employers are in an unenviable position. They must make sure their retirement plan offers a prudently selected and diverse range of investment choices, and they want their employees to be properly invested to maintain their standard of living in retirement. However, even when offered the best investments, most participants lack the experience to build and manage the diversified portfolio necessary to help reach their retirement goals. The good news is that managed accounts make it more likely they will be properly invested. Just as not everyone needs to be a doctor to enjoy good health, not everyone needs to be a licensed investment professional to enjoy a financially healthy retirement when they have access to managed accounts.

So, what is a managed account? It’s a portfolio of investments with an asset allocation that is designed to meet a diverse set of a participant’s individual characteristics: their age, life expectancy, retirement date, other retirement savings and assets, unique goals and risk tolerance. The account is regularly monitored and rebalanced (managed) on the participant’s behalf by an investment professional.

In 401(k) and 403(b) plans, managed accounts come in different forms. The optimum solution is a set of model asset-allocation portfolios with a range of risk and anticipated return characteristics accompanied by guidance to help participants select the model best for their unique situation. Guidance can include a suite of user-friendly tools, such as a traditional questionnaire, a dynamic website and, importantly, the individual assistance of a financial professional.

Some plans allow participants to pay an additional fee and, after answering questions about their circumstances and goals, have a financial advisor select a set of funds and manage them on the participant’s behalf. While it is likely the investment return of such a managed account will be higher than the return of a participant-assembled portfolio and thus worth the fee, employers would be advised to seek plans that offer managed accounts with no additional cost.

While managed accounts have historically been more available in large retirement plans, they are increasingly offered in smaller 401(k) and 403(b) plans with less than $100 million in assets, making them an easy choice over the Target Date Funds that have dominated the small plan market.

Since the sole criterion for a participant selecting a Target Date Fund is the year they plan to leave the workforce, managed accounts increase the ability of participants to be properly invested according to their unique circumstances. To continue our medical analogy, the difference between a plan with TDFs versus a plan with managed accounts is like the difference between referring a sick employee to a vending machine that dispenses medicine based upon limited user input and average user needs, rather than a doctor who engages directly with them and fully investigates their needs before prescribing a solution.

Employers should also remember that their selection of the Target Date Fund series for the company retirement plan creates potential liability. Since TDF series vary widely by asset allocation, glide path and management philosophy, employers must understand their plan’s Target Date Funds and be able to explain how the series meets the needs of their workforce.

If your plan is currently using Target Date Funds and you would like to learn more about managed accounts, or if your plan simply hasn’t had a “checkup” in the last year, I encourage you to reach out to me via phone or email. As the saying goes, an ounce of prevention is worth a pound of cure!

This blog is written to help make the lives of plan sponsors easier in the process of meeting legal requirements under ERISA for their defined contribution plans. Please understand that reading this blog should not alone take the place of a one-on-one consultation regarding the needs of your specific plan, and hence cannot be a guarantee against fiduciary breaches.